As I reflect back on my years in high school and even college, one thing has become readily apparent: learning about the many facets of financial management wasn't part of the plan.
Admittedly, the constraints on the education system these days are tremendous. Veritably every parent has an idea of what their child should be learning in school. But, when push comes to shove, America's kids are woefully unprepared for the real world when they graduate with respect to their financial knowledge.
A financial literacy survey conducted by the Financial Industry Regulation Authority, or FINRA, that was released last year demonstrates just how much trouble our nation's young adults could be in when it comes to their finances. The five-question survey covered relatively basic topics such as interest, savings, and investments. A passing score was considered four or five questions out of five answered correctly. Less than a quarter of millennials aged 18 to 34 passed the quiz.
Arguably a lot of these issues could be solved if they taught basic life skills in school as it relates to our everyday finances. Here are six things that I should have learned when I was in school, but didn't until after I graduated and sought the answers out for myself.
1. How to balance a budget
In terms of basic money management skills, nothing is more critical than understanding your cash flow. Most people have a pretty good bead on how much money is coming in via paychecks, but when you ask them where their money went by the end of the pay period you're liable to get a shoulder shrug.
Students in school should be taught early and often about the basics of keeping a record of their financial transactions. This means recording cash flow into and out of a checking account, and understanding how to properly formulate a budget. Operating on a budget will teach critical money management skills that should allow students to save money and not live paycheck to paycheck -- something that could come in handy if they graduate with student loan debt or don't land their dream job right out of high school or college.
2. How to manage credit
Another financial nugget of wisdom not being taught in schools is the concept of credit, credit scores, and how lending rates can affect our financial decisions.
Not understanding your credit score, or what goes into the makings of a credit score, can be a big problem. In general, your credit score is the single most important component that will determine whether or not a financial institution will lend to you. It's also a determinant of what interest rate you'll qualify for. The higher your credit score, the more favorable the lending rate, and the more financial institutions are likely to compete to obtain your business (which could further lower your lending rate).
Along those same lines, it's imperative today's youth understand the concept of interest and how dangerous making minimum payments on a credit card can be. According to a 2011 Harvard study by Dennis Campbell that looked at Affinity Plus Federal Credit Union's 30,000+ member portfolio of credit card holders, a mere 8% of members were on track to pay off their credit cards in 36 months (three years) or less. This means more than nine out of 10 cardholders are in danger of paying substantial interest fees over the life of their debt.
3. How to invest for retirement
It's not only important that schools teach kids how to save and manage their credit profile, but it's equally important that they teach students how to invest for their future.
A Money Pulse survey from Bankrate in April showed that, for adults under the age of 30, only 26% owned stock. That might not seem like a terrifying figure, but with time and compounding being the best friend of the long-term investor, it could really put millennials in a tough bind come retirement. The reason is the stock market has historically returned 7% per year. Comparatively, next to bonds, CDs, money market accounts, savings accounts, and metals, it's been the greatest long-term creator of wealth. Other investment vehicles may not even outpace the rate of inflation, resulting in real money losses.
On top of understanding their basic investment options, students should also be introduced to common tax-advantaged retirement vehicles like IRAs and 401(k)s, and they should leave school with a basic understanding of what Social Security and Medicare cover and how these entitlement programs could affect them before and after retirement.
4. How taxes affect us
Who here remembers getting their first paycheck and feeling dumbfounded at all the deductions that were taken out? I (vaguely) remember I did because I wasn't taught about the basics of taxes -- why we pay them and who benefits from our tax payments -- in school.
Since all working Americans pay taxes, all students should be taught some tax basics. They should understand how much we pay in payroll taxes, and ultimately how those payroll taxes get funneled into the Social Security program. Students should also understand why federal income taxes, state income taxes, and Medicare taxes exist, and be prepared to estimate how much of their paycheck may wind up being taken out to cover taxes. Understanding how much you'll pay annually, monthly, or weekly in taxes is another component to proper budgeting.
5. How to market yourself and interview for a job
I'm not exactly sure how schools get away without teaching this, but at no point during my tenure in high school and college was I ever taught the basics of developing a resume, how to market myself, or how to be interviewed by a prospective employer. In my opinion, these real-world situations should be at the top of the list of what we're teaching in school.
Throughout high school we should be teaching students the skills necessary to land a well-paying job. These include how to prepare a resume and highlight their strengths, how to find and apply for a job, how to successfully interview and sell their strengths in person, and also how to negotiate contracts and/or their salary. Without these basic tools, millennials and generation Z could wind up being underpaid and/or underemployed.
6. How to set goals
Finally, schools need to do a better job of teaching students about goals and goal-setting.
Understandably goal-setting sometimes involves more than just your finances. Taking a European vacation, owning a beach house in Florida, or being married with two kids and a white picket fence by the age of 35, are all examples of potentially lofty goals. However, most goals will ultimately tie back into your finances. You need to be able to save enough in order to take a trip to Europe, buy a beach house, or start a family.
Schools these days should be teaching students about creating achievable goals for the short- and long-term, and should be advising students on how to hold themselves accountable. This means creating measurable goals that are easy to keep track of.
Although I personally believe these six financial nuggets of wisdom should be taught in our schools, there's no reason kids these days shouldn't also be learning about these concepts in their home. If you have the time and the know-how, there may be no greater gift you can give your child than giving them a head start in understanding real-world financial concepts.